A Clear Look at China's SOEs

The past decade has seen a global wave of investments abroad by China's state-owned enterprises (SOEs), particularly in the resource sectors. These investments have caused much controversy in Western democracies, perhaps most notably with the failed attempt by the Chinese National Offshore Oil Corporation (CNOOC) to purchase the U.S. energy firm Unocal in 2005. In 2012, Canada was ground zero for China's latest attempt to use its SOEs to purchase major foreign energy assets with the proposed CNOOC takeover of Nexen, a controversial deal which was ultimately approved by the Canadian and U.S. governments and completed earlier this year. During these Chinese SOE takeover attempts, we generally see a pro-China propaganda war playing itself out in various mainstream media outlets in an attempt (successful in the case of CNOOC-Nexen) to sway public and regulatory opinion. But in order to construct rational policy positions, we need to look more closely as to who actually controls these enterprises.

It is clear that the People's Liberation Army (PLA) of China is under the direct control of the Communist Party of China (CPC). But so is CNOOC, as their website conveniently states: "China National Offshore Oil Corporation ('CNOOC'), the largest offshore oil and gas producer in China, is a mega government owned company operating directly under the State-owned Assets Supervision and Administration Commission [SASAC] of the State Council of the People's Republic of China." Referring to the SASAC website, the "Central SOEs" are listed, all 117 of them at the time of writing. CNOOC is listed as #13.

In SASAC's "Guidelines to the State-owned Enterprises Directly under the Central Government on Fulfilling Corporate Social Responsibilities," we find the following statement:

Fulfilling CSR [corporate social responsibilities] requires the CSOEs [state-owned enterprises directly under the central government], insisting on the principle of human-oriented and the Scientific Outlook on Development, to be responsible to stakeholders and environment, so as to achieve well-balance among the growth of enterprises, social benefit and environment protection. This is not only an important measure for promoting the socialist harmonious society and also an embodiment of the CSOEs to thoroughly implement the China's new ideas about economic development, social progress and environment protection.

Thus, the role of SOEs is to promote communism (i.e., a "socialist harmonious society") and implement China's "new ideas about ... social progress." This does not sound like an adherence to free-market principles (which many proponents of Chinese SOEs claim these organizations do). As well, SASAC states that "[t]he CSOEs should give full play to the political core role of the Communist Party of China (CPC) branches in the enterprise; encourage CPC members to take the lead in performing CSR." In case we were confused as to who actually runs the SOEs, it is the Communist Party of China. Not market mechanisms, but the CPC.

Moving on to SASAC's document entitled "Decree of the State Council of the People's Republic of China No. 378: Interim Regulations on Supervision and Management of State-owned Assets of Enterprises," we read that "[t]he State Council represents the State in performing the responsibilities of investor in large State-owned enterprises, State-owned holding enterprises and enterprises with State-owned equity, which have a vital bearing on the lifeline of the national economy and State security, and in large State-owned enterprises, State-owned holding enterprises and enterprises with State-owned equity within such sectors as important infrastructure and natural resources." More emphasis that the CPC directly controls any and all activities of Chinese SOEs at home and abroad.

For those who continue to claim that Chinese SOEs enjoy independence from the Communist Party of China, we will examine this statement:

The invested enterprises and the enterprises set up with the investment of such invested enterprises enjoy autonomy in their operation as provided by the relevant laws and administrative regulations. The State-owned assets supervision and administration authority shall support the independent operation of enterprises according to law, and shall not interfere in their production and operation activities, apart from performing the responsibilities of investor.

This translates into a nonsensical and contradictory claim of SOE autonomy with concurrent investor oversight and control by the Communist Party of China. An intellectual shell game this is. SOEs are under the direct control of the CPC. Investors are often not simply interested in profit maximization. Political and social objectives can play major roles in investor decisions.

The following SASAC statement is also informative:

The build-up of primary organizations of the Communist Party of China, the development of socialist ideological and cultural progress, the improvement of the Party's work style and the build-up of clean government in State-owned enterprises, State-holding enterprises and enterprises with State-owned equity shall be conducted pursuant to the Constitution of Communist Party of China and other relevant provisions.

Similarly, the websites for PetroChina and Sinopec also acknowledge their subservience to SASAC (and -- by extension -- the CPC).

As noted above, the PLA is also under the direct control of the Communist Party of China. So, if Party A controls Party B and Party C, and you do business with Party C, whom else are you indirectly doing business with? Party B. It is irrelevant whether one of China's SOEs purchases assets in Western democracies, or whether the Chinese People's Liberation Army purchases the same assets. They are both under the direct control of the Communist Party of China. Everything in the middle is just smoke and mirrors, in contrast to media commentators who try to claim that "CNOOC is not the Politburo dressed up in pinstripes."

Many in the West must remove their rose-colored glasses regarding Chinese SOEs. Our nations are engaged in relationships with China that threaten not only our core democratic and human rights values, but also many of our key economic sectors and national security. China's SOEs are under the control of their governing communist government and act on its behalf and for the best interests of the communist party, and not for the best interests of any minority investors and/or the nations in which the SOEs are investing. Decisions surrounding Chinese SOE investment in the USA, Canada, and other Western democracies should be made with these facts in mind, and not based instead on a utopian vision that includes the oxymoronic concept of free market-driven state-owned firms that we pretend are not under the direct control of a communist police state.

The past decade has seen a global wave of investments abroad by China's state-owned enterprises (SOEs), particularly in the resource sectors. These investments have caused much controversy in Western democracies, perhaps most notably with the failed attempt by the Chinese National Offshore Oil Corporation (CNOOC) to purchase the U.S. energy firm Unocal in 2005. In 2012, Canada was ground zero for China's latest attempt to use its SOEs to purchase major foreign energy assets with the proposed CNOOC takeover of Nexen, a controversial deal which was ultimately approved by the Canadian and U.S. governments and completed earlier this year. During these Chinese SOE takeover attempts, we generally see a pro-China propaganda war playing itself out in various mainstream media outlets in an attempt (successful in the case of CNOOC-Nexen) to sway public and regulatory opinion. But in order to construct rational policy positions, we need to look more closely as to who actually controls these enterprises.

It is clear that the People's Liberation Army (PLA) of China is under the direct control of the Communist Party of China (CPC). But so is CNOOC, as their website conveniently states: "China National Offshore Oil Corporation ('CNOOC'), the largest offshore oil and gas producer in China, is a mega government owned company operating directly under the State-owned Assets Supervision and Administration Commission [SASAC] of the State Council of the People's Republic of China." Referring to the SASAC website, the "Central SOEs" are listed, all 117 of them at the time of writing. CNOOC is listed as #13.

In SASAC's "Guidelines to the State-owned Enterprises Directly under the Central Government on Fulfilling Corporate Social Responsibilities," we find the following statement:

Fulfilling CSR [corporate social responsibilities] requires the CSOEs [state-owned enterprises directly under the central government], insisting on the principle of human-oriented and the Scientific Outlook on Development, to be responsible to stakeholders and environment, so as to achieve well-balance among the growth of enterprises, social benefit and environment protection. This is not only an important measure for promoting the socialist harmonious society and also an embodiment of the CSOEs to thoroughly implement the China's new ideas about economic development, social progress and environment protection.

Thus, the role of SOEs is to promote communism (i.e., a "socialist harmonious society") and implement China's "new ideas about ... social progress." This does not sound like an adherence to free-market principles (which many proponents of Chinese SOEs claim these organizations do). As well, SASAC states that "[t]he CSOEs should give full play to the political core role of the Communist Party of China (CPC) branches in the enterprise; encourage CPC members to take the lead in performing CSR." In case we were confused as to who actually runs the SOEs, it is the Communist Party of China. Not market mechanisms, but the CPC.

Moving on to SASAC's document entitled "Decree of the State Council of the People's Republic of China No. 378: Interim Regulations on Supervision and Management of State-owned Assets of Enterprises," we read that "[t]he State Council represents the State in performing the responsibilities of investor in large State-owned enterprises, State-owned holding enterprises and enterprises with State-owned equity, which have a vital bearing on the lifeline of the national economy and State security, and in large State-owned enterprises, State-owned holding enterprises and enterprises with State-owned equity within such sectors as important infrastructure and natural resources." More emphasis that the CPC directly controls any and all activities of Chinese SOEs at home and abroad.

For those who continue to claim that Chinese SOEs enjoy independence from the Communist Party of China, we will examine this statement:

The invested enterprises and the enterprises set up with the investment of such invested enterprises enjoy autonomy in their operation as provided by the relevant laws and administrative regulations. The State-owned assets supervision and administration authority shall support the independent operation of enterprises according to law, and shall not interfere in their production and operation activities, apart from performing the responsibilities of investor.

This translates into a nonsensical and contradictory claim of SOE autonomy with concurrent investor oversight and control by the Communist Party of China. An intellectual shell game this is. SOEs are under the direct control of the CPC. Investors are often not simply interested in profit maximization. Political and social objectives can play major roles in investor decisions.

The following SASAC statement is also informative:

The build-up of primary organizations of the Communist Party of China, the development of socialist ideological and cultural progress, the improvement of the Party's work style and the build-up of clean government in State-owned enterprises, State-holding enterprises and enterprises with State-owned equity shall be conducted pursuant to the Constitution of Communist Party of China and other relevant provisions.

Similarly, the websites for PetroChina and Sinopec also acknowledge their subservience to SASAC (and -- by extension -- the CPC).

As noted above, the PLA is also under the direct control of the Communist Party of China. So, if Party A controls Party B and Party C, and you do business with Party C, whom else are you indirectly doing business with? Party B. It is irrelevant whether one of China's SOEs purchases assets in Western democracies, or whether the Chinese People's Liberation Army purchases the same assets. They are both under the direct control of the Communist Party of China. Everything in the middle is just smoke and mirrors, in contrast to media commentators who try to claim that "CNOOC is not the Politburo dressed up in pinstripes."

Many in the West must remove their rose-colored glasses regarding Chinese SOEs. Our nations are engaged in relationships with China that threaten not only our core democratic and human rights values, but also many of our key economic sectors and national security. China's SOEs are under the control of their governing communist government and act on its behalf and for the best interests of the communist party, and not for the best interests of any minority investors and/or the nations in which the SOEs are investing. Decisions surrounding Chinese SOE investment in the USA, Canada, and other Western democracies should be made with these facts in mind, and not based instead on a utopian vision that includes the oxymoronic concept of free market-driven state-owned firms that we pretend are not under the direct control of a communist police state.